The Executive Board of the International Monetary Fund (IMF) today completed the first review of Argentina's performance under a seven-month Stand-By Credit Arrangement approved on January 24, 2003 (see Press Release No. 03/09). The arrangement is designed to cover all payment obligations to the IMF through August 2003. Today's decision releases an additional amount of SDR 226 million (about US$307 million) under the Stand-By Arrangement.

The Executive Board also approved Argentina's request for waivers of nonobservance of the structural performance criteria on the issuance of new banking regulations and on the congressional approval of the fuel tax conversion to an ad-valorem tax.

"At this stage of the first review of Argentina's program, the financial program is well within the agreed framework. Recent financial and economic indicators are encouraging, pointing to a continuing recovery in economic activity and confidence. There are, however, many challenges ahead. With regard to structural reform, progress is being made in some areas, particularly in dismantling exchange restrictions and strengthening contacts with external creditors; however, in other areas, especially in steps to rebuild the banking system, there have been delays.

"Regarding fiscal policy, the federal primary surplus during January-February 2003 exceeded the programmed level, mainly as a result of higher revenue from income taxes, trade, and the financial transactions tax, as well as prudent expenditure management. A better-than-expected outturn for provincial finances in 2002, and the timely signing by most provincial governors of the 2003 bilateral agreements, should anchor continued provincial adjustment in 2003. The authorities are encouraged to work closely with Congress to secure early passage of the delayed fiscal structural measures, and with the other international financial institutions, with the expectation that this will serve to accelerate disbursements of external loans. Social sector lending is helping to alleviate the social costs of the crisis and preventing a larger share of the population from falling below the poverty line.

"The financial authorities are to be commended for keeping monetary policy in line with the program, increasing the size and depth of the market for central bank paper, and further liberalizing exchange controls. In the coming months, a continued prudent monetary policy will be essential to anchor inflation expectations. The early release of frozen deposits has so far not affected the stability of bank deposits, but this process should continue to be approached with caution. The recent Supreme Court ruling that the pesoization of a provincial government's dollar deposit in one state bank was unconstitutional has added to uncertainties that should be resolved as quickly as possible.

"Regarding bank reforms, the Fund looks forward to the implementation of bank and private debt restructuring measures envisaged under the program. It is strongly recommended that the authorities issue a full set of revised prudential regulations, and define, and put into effect, a mechanism to compensate banks for the adverse impact of asymmetric indexation and amparos at an early date. The planned diagnostic reviews of the three main public banks should also be launched without further delays. To facilitate private debt restructuring, the authorities should make all efforts to ensure legal certainty and protect creditor rights.

"The authorities have recently intensified their dialogue with private external creditors, and have agreed to draw up an action plan, in consultation with the recently appointed debt advisor, to carry the debt restructuring process forward. While welcoming these actions, the Fund looks forward to further progress being made by Argentina on the preparatory technical work for debt restructuring, including the development of a database of bondholders and the preparation of a menu of options for restructuring.

"The Fund will continue to give full support to the authorities' transitional program in order to underpin stability during the upcoming political transition. The authorities are encouraged to stay the course of their policy commitments under the program. Continued prudent macroeconomic policies, along with progress in the implementation of structural reforms—particularly in the banking and public debt restructuring areas—would facilitate the transition to the new administration, consolidate the recent gains in financial stability, and help to secure timely disbursements of additional external financing," Mr. Köhler said.